Wealthy families are thinking bigger about how to improve their communities — and the world.
From climate change to the recent COVID-19 pandemic, there’s a growing sense of urgency over how to solve major global challenges. For many wealthy families, this is prompting a fundamental shift in how they approach their charitable giving.
Increasingly, donors are using philanthropic capital to try to create a measurable impact. This can mean making bigger charitable grants to fewer traditional charitable organizations, taking a more active role to improve the effectiveness of non-profit organizations, aligning investments with philanthropic values or all of the above.
“We hear people say, ‘I’m frustrated with my giving. Isn’t there a better way to do it?’” says Avery Tucker Fontaine, head of strategic philanthropy for BNY Mellon Wealth Management. “There’s an understanding that large issues aren’t going to be solved by non-profits alone, and there’s an openness to new solutions.”
An impact-oriented philanthropic plan may include making donations to organizations with highly targeted aims, such as a relief organization created to support workers laid off in a particular industry as a result of the pandemic. It could also mean providing loans to a for-profit company that is restoring affordable housing in a neglected neighborhood or supplying capital to a revenue-producing arm of a non-profit organization to help it grow and become more effective.
While philanthropy is often referred to as a way to “give back,” a more apt description of an impact approach would be to “build up” local and global communities. For example, short of building their own non-profit, many wealthy families focus on bolstering existing organizations whose effectiveness is impeded by organizational or governance weaknesses or other issues.
“A family may come to us and say they care about the environment and education, and they want to start locally, but the non-profits in their community may not be equipped to move forward,” Fontaine says. “There’s a growing interest to help strengthen these non-profits to build their capacity to solve problems.”
Getting Everyone on the Same Page
Changes in philanthropic approaches have been driven by a younger generation that is less wedded to tradition and increasingly frustrated with the slow pace of change in the face of mounting societal ills.
At an estimated 73 million strong, Millennials have overtaken the 72 million Baby Boomers in sheer numbers, and they’re proving a force to be reckoned with when it comes to concerns about social and environmental issues. Interestingly, Generation X appears to be the most active in impact investing and probably best positioned to make systemic changes, Fontaine says. “Generation X has all their degrees and training behind them and are in their peak earning years. For example, an estimated 55% of all startup founders are in this generation.”
But moving mountains through philanthropy requires more than powerful positions and wealth. It requires a well-structured plan.
The first step? Clearly define a mission, Fontaine says. At BNY Mellon Wealth Management, advisors work with families to help them share ideas and set priorities through multigenerational family meetings. “We do exercises around honing a vision and discuss how to structure philanthropy so everyone has a say,” she says.
At meetings like these, BNY Mellon’s advisors will often describe the general characteristics of all generations present—from the Greatest Generation to Generation Z—and have each family member choose which traits they identify with. This exercise often prompts laughter and fun family stories, but also leads to an important discussion about values, Fontaine says.
Once a mission is established, BNY Mellon Wealth Management helps families weigh four philanthropic impact options to consider in addition to traditional grant-making:
Fund the revenue-generating division of a non-profit organization. This is a common structure that essentially helps the non-profit create a pure profit center, further lessening its dependence on grants and gifts. One example might be the for-profit meal prep and delivery service of a charitable meal provider.
Invest in or extend financing to for-profit companies whose businesses drive change. This may be a company making solar panels more accessible to low-income communities or refurbishing computers to fulfill needs in underfunded schools.
Invest in “B corporations,” which are businesses recognized for committing to regular audits and for maintaining standards on a range of issues from gender equality to the environment.
Environmental, social and governance (ESG) investing, which involves scrubbing a portfolio based on a particular value system (eschewing gun manufacturers or various “sin” stocks, for example), or investing in companies that have high ratings on ESG factors.
Often the size of philanthropic capital will help determine which combination of impact strategies and tools will work best—and which may need to be struck from the list altogether. For example, you may be dissatisfied with a non-profit organization’s reporting method, but if you want to influence change in its practices, “$10,000 is probably not enough, but $10 million might be,” Fontaine says. “We work with families and non-profits to see what makes sense and what doesn’t.”
Gifting cash or appreciated assets to traditional non-profit organizations continues to be a mainstay for any charitable plan, but there are numerous complexities as charitable tools each have their own tax implications, limitations and costs.
Most families use multiple tools, with each chosen to solve a particular issue. For example, Fontaine explains that when one family couldn’t agree on a shared mission, donor-advised funds (DAFs) were the tool to solve the problem—as they are inexpensive to set up, easy to manage and enable donors to give through established organizations but still maintain a measure of control. “They set up the DAFs as satellites for different branches of the family,” she says. “While the scale of the individual structures was more limited, each branch could run their own.”
Ultimately, Fontaine adds, there is no one-size-fits-all solution. “The best plan is one that focuses on the intersection of what’s best for the family’s philanthropic goals and estate-planning needs.”